Basic Accrual Accounting Concepts by salenathao

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									SURVEY OF ACCOUNTING
CHAPTER 3

CARL S. WARREN
COPYRIGHT © 2009 South-Western/Cengage Learning

Learning Objectives LEARNING OBJECTIVES
After studying this chapter, you should be able to…

1. Describe basic accrual accounting concepts, including the matching concept. 2. Use accrual concepts of accounting to analyze, record, and summarize transactions.
Continued…

Learning Objectives
3. Describe and illustrate the end-of-period adjustment process. 4. Prepare financial statements using accrual concepts of accounting, including a classified balance sheet. 5. Describe how the accrual basis of accounting enhances the interpretation of financial statements.

Learning Objective 1
Describe the basic accounting concepts, including the matching concept.

Basic Accrual Accounting Concepts
Transactions…
• are recorded as they occur. • are recorded even if cash is not paid or received. • affect the accounting equation (A=L+OE).

Meaning of Accrual
Revenue is recognized (recorded) when earned. Liabilities are recognized when the obligation is incurred.

Matching Principle
When revenues are earned and recorded, all expenses incurred in generating the revenues must also be recorded. Matching subtracts expenses incurred from revenues earned to arrive at Net Income or Net Loss.

Learning Objective 2
Use accrual concepts of accounting to analyze, record, and summarize transactions.

Family Health Care, P.C.
Earns revenue when services are provided to patients.
• Earnings process is complete. • Patient is obligated to pay.

Incurs expenses to generate revenue.
• Recognizes expenses according to the Matching Principle.

Family Health Care, P.C. Transactions for November
Transactions include…
• Revenue: cash and on account. • Assets: acquiring insurance and buying equipment. • Expenses: recording insurance and depreciation expenses. • Other.

Family Health Care, P.C. Unearned Rent Revenue

Family Health Care, P.C. receives a rent payment for use of its land in advance.

Family Health Care, P.C. Prepaid or Deferred Expenses

Family Health Care, P.C. buys a 2-year business insurance policy.

Family Health Care, P.C. Prepaid or Deferred Expenses

Family Health Care, P.C. buys a 6-month medical malpractice insurance policy.

Family Health Care, P.C. Stock Investment

Dr. Landry invests more money in the business and receives capital stock.

Family Health Care, P.C. Purchase on Credit: Accounts Payable

Family Health Care, P.C. purchases supplies on account.

Family Health Care, P.C. Purchase of Capital Assets

Family Health Care, P.C. purchases office equipment by making a $1,700 down payment and having five additional monthly installments of $1,360.

Family Health Care, P.C. Services on Credit: Accounts Receivable

Family Health Care, P.C. performed services to patients on account.

Family Health Care, P.C. Services for Cash

Family Health Care, P.C. performed services to patients who paid with cash.

Family Health Care, P.C. Collection of Accounts Receivable
Family Health Care, P.C. received payment from patients’ insurance companies for prior services performed.

Family Health Care, P.C. Payment of Accounts Payable

Family Health Care, P.C. paid for supplies previously purchased on account.

Family Health Care, P.C. Payment of Expenses

Family Health Care, P.C. incurred expenses for the month of November.

Family Health Care, P.C. Payment of Dividends

Family Health Care, P.C. paid dividends.

Learning Objective 3
Describe and illustrate the end-of-period adjustment process.

The Adjustment Process
Necessary to match revenues and expenses – application of the matching concept. Completes the information necessary for financial statement preparation.

Deferrals
Created by recording a transaction in a way that delays the recognition of an expense or a revenue. Examples:
• Prepaid/deferred expenses • Unearned/deferred revenues

Accruals
Created when a revenue or expense has been earned or incurred, but has not been recorded at the end of an accounting period. Examples:
• Accrued expenses/liabilities • Accrued revenues/assets

Family Health Care, P.C. Deferrals

Deferred expenses:
• Prepaid insurance expired, $1,100 • Supplies used, $150 • Depreciation on office equipment, $160

Deferred revenue:
• Unearned revenue earned, $360

Family Health Care, P.C. Deferred Expense – Prepaid Insurance

Family Health Care, P.C. Deferred Expense – Supplies

Family Health Care, P.C. Deferred Expense – Depreciation

Family Health Care, P.C. Deferred Revenue – Unearned Rent

Family Health Care, P.C. Accruals

Accrued expense:
• Wages owed but not yet paid, $220

Accrued revenue:
• Services provided but not yet billed, $750

Family Health Care, P.C. Accrued Expense – Wages

Family Health Care, P.C. Accrued Revenue – Fees Earned

Learning Objective 4
Prepare financial statements using accrual concepts of accounting, including a classified balance sheet.

Financial Statements
Family Health Care, P.C. prepares the four required financial statements to summarize November activity after adjustments:
• • • • Income Statement Retained Earnings Statement Balance Sheet Statement of Cash Flows

Need Balance Sheet

Learning Objective 5
Describe how the accrual basis of accounting enhances the interpretation of financial statements.

Accrual Basis Accounting
Enhances interpretation of financial statements by following a standard set of rules (GAAP) for recording and reporting. Is a better predictor of long-term profitability. Required for publicly held corporations.

Cash Basis Accounting
Transactions are recorded when cash is paid or received. Used by individuals and small businesses.

Cash vs. Accrual

Accrual Accounting Uses the Accounting Cycle
Basic steps of the accounting cycle:
• Identifying, analyzing, and recording the effects of transactions on the accounting equation. • Identifying, analyzing, and recording adjustment data. • Preparing financial statements.

All steps were illustrated in this chapter!

End of Chapter 3


								
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